USDJPY started the week strong running towards the 107.00 figure in early Tokyo dealing, but news of a possible corruption scandal in Abe administration derailed the move and sent the pair tumbling back below 106.50 by morning London session.

A complex scandal involving a land sale to a well-connected businessman that was able to purchase government land at well below market prices, rocked the Abe administration on charges of cronyism. in a major admission, the finance ministry said it had altered related documents it submitted to parliament as part of the probe. The changes included removing the names of Abe, his wife, and finance minister Taro Aso. In addition, Abe and Aso’s names were nixed from an explanatory section about the school’s ties with far-right pressure group Nippon Kaigi.

On March 9, National Tax Agency head Nobuhisa Sagawa stepped down to take responsibility for the controversy. A few days earlier, a finance ministry official involved in the land sale was found dead from an apparent suicide.
Today the Mainichi newspaper reported that, according to senior government officials, dozens of passages in 14 related documents had been altered between February and April last year. In addition to the name removals, the use of the word “exceptional” to describe the land deal was also removed.

It’s difficult to handicap if Mr. Abe will survive the investigation which at first glance shows clear signs of corruption and cover-up. Although the scope of the deal appears to be small, and Mr. Abe does not appear to have personally profited from the deal and may yet survive the inquiry.

The news, however, casts a pall of doubt over Mr. Abe’s ability to govern well at a crucial time for Japan both economically and politically. Japan’s economy appears to be finally coming out of its decades-long deflationary slumber while at the same time facing key geopolitical risks with North Korea.

Political turmoil rarely has long-lasting impact on the FX market, and traders could still lift USDJPY through 107.00 before days end (as we have argued previously, there are several good reasons for a rally, including more hawkish Fed, continued expansion of US economy and lower risk with North Korea) but for now the pair is feeling the pressure of political pain and if the scandal news gets worse the pair could once again test support at 105.00